High flier: IndiGo world’s second most expensive aviation stock

Mumbai: IndiGo, India’s largest airline, which commenced operations in 2006, has become the world’s second most expensive aviation stock.

The company, which has the lowest turnover among the top 20 global airlines, is currently trading at 19 times its FY18 estimated PE, behind South American company Latam Airlines.

IndiGo went public on November 10, 2015. It began life as the world’s second most expensive stock, though it slipped for a while in August 2016. In an industry in which companies typically struggle to make money, its success is all the more noteworthy.


The world’s biggest airlines company, Delta Airlines, with a turnover of $41 billion and $3.6 billion net profit, is currently trading at a PE of 8.32, while the second-biggest airline, Southwest, with a net profit of $ 3.5 billion, commands a PE of 11.15.

At least 17 of the 21 analysts tracking IndiGo have a buy recommendation. However, some analysts have expressed reservations over future prospects because of rising crude prices and the grounding of three A320 Neo planes.

IndiGo recently grounded three A320 Neo planes as a precautionary measure after the European Aviation Safety Agency, a body of the European Union with regulatory and executive tasks in the field of civilian aviation safety, warned of a new issue on the engine programme. A320 Neo deliveries to Indian carriers had picked up after Pratt and Whitney (P&W) affirmed that it had fixed some of the issues plaguing its geared turbo fan (GTF) engines. However, the relief has proven to be short-lived, as the engine has run into fresh problems.

“This development is an incremental negative to the company. In the absence of a planned Neo aircraft delivery, we believe Indigo will either have to continue expansion with more expensive short-term leases, or cut down its capacity growth over FY 2019-20,” said Saurabh Kumar, analyst, JP Morgan.

“Though overall near-term financial impact to IndiGo may be limited as it receives compensation from P&W for grounded engines, it does hit operations by reducing flexibility and increasing reliance on shortterm leases,” he added.

The stock has declined 4 per cent in the past six months compared to 28 per cent rise in Jet Airways’ stock price and 5 per cent jump in that of SpiceJet.

IndiGo’s fuel unit cost increased by 13.7 per cent in December quarter over previous quarter as average aviation turbine fuel (ATF) prices shot up by 12.5 per cent. In January 2018, ATF rate has further increased to ?59,000. “Higher crude cost is expected to be a drag on the profitability over the next few quarters as we expect a gradual passthrough,” said Vishal Rampuria, analyst, HDFC Securities.